It doesn’t amount to BlackRock vs. Google as yet. But asset managers are starting to fret over the potential threat they face from the world’s largest technology companies.

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After all, it has simply been too good for asset managers for too long. Fees for active managers have not fallen, even during periods of low returns.

Operating margins are 40%, and rising, thanks to the way managers have used technology to cut costs and beef up their investment offerings.

Technology has also helped managers, most recently Neil Woodford, to set up their own boutiques, which provide plenty of fodder for internet platforms. Where once human managers sold investment products and provided advice, now the growth area is in online platforms where the client can pick and choose.

Hargreaves Lansdown has led the way in this growth in the UK. Cofunds and Allfunds are spreading their online offerings across Europe. According to data provider The Platforum, platforms administered UK funds worth £275 billion in March.

But the efforts of asset managers to exploit technology will look puny if tech giants such as Google, Facebook or Amazon choose to turn their technological firepower to asset management.

What the managers have to fear is the tech firms’ awesome distribution abilities plus their possession of, and ability to profit from, colossal stores of data to target potential clients.

The tech firms have already displayed sufficient ambition and inventiveness in financial services to make traditional asset managers worry about what they might try next. The tech firms certainly show no aversion to handling other people’s cash.

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Managers started twitching last month on reports that Facebook wanted to set up a Dublin-based online money transmission service for Europe.

A Facebook spokesman declined to comment but, in the US, Google has already introduced Google Wallet, which enables customers to use their phones to make payments in shops or online.

Amazon owns one of the most sophisticated cash management systems on the planet to support its online sales. It has also started to market credit cards via its online distribution channels, plus apps for asset managers like Fidelity and Vanguard.

Jamie Dimon, chief executive of JP Morgan, is alert to the threat technology companies pose to his payments business. Earlier this year, he said: “When I go to Silicon Valley… they all want to eat our lunch. Every single one of them is going to try.”

Francisco González, chief executive of Spanish bank BBVA, warned in the Financial Times last year that his sector needed to brace itself. He said: “I think banks that are not prepared for such new competitors face certain death.” To fend this off, he has forged a close association with Google.

That threat may also lie in wait for others in financial services, because the tech firms’ mastery of money transmission gives them a route into fund management, if they have the determination to apply for a licence.

If the future of fund management lies in tailoring online offerings to potential clients’ needs, look at the talents the tech firms already possess. Amazon bases product recommendations on consumers’ histories.
Google has profiles of us all. Is it fanciful to imagine that online investors might follow fund “likes” on Facebook?

Chinese technology giants Baidu, Tencent and Alibaba are leading the way by offering asset management and wealth advisory services through their portals.

Alibaba’s online e-commerce business agreed to buy 51% control of Tianhong Asset Management last year. It is offering its services through a platform called Yu’e Bao (literally “leftover treasure”), which stands ready to put spare client cash into higher-yielding money market funds.

Trust in technology

By the end of the first quarter, its assets had spiralled to $89 billion, making Tianhong the second biggest asset manager in China. The popularity of the service could help Tianhong market other funds to Alibaba users.

According to a PricewaterhouseCoopers report: “It was successful, in part, due to the strong trust of the general public to being an affiliate of a technology company and providing a tailored product.”

In the west, as in China, the younger generation already trusts their smartphones more than asset managers, whose investments can fall as well as rise.

Financial technology is starting to spread its attention to asset management. Fintech protagonist Anthemis Group has, to date, backed three fund managers, according to its co-founder Udayan Goyal, who previously worked at Deutsche Bank.

One of his clients, Betterment, charges clients as little as 15 basis points to back ETFs, using an agreed risk profile. Blueleaf provides a portfolio monitoring service. ZyFin of India has developed a range of customised indices.

According to Goyal, individual clients will become more discerning over the services for which they are prepared to pay. He said: “They will want to get more engaged.” Exchange-traded fund formats make buying and selling particularly easy.

Alan Brown, senior adviser to Schroders, believes managers need to grasp the issues thrown up by the new way of thinking, as a matter of urgency. He said: “It’s a distribution nettle we have to grasp.”

Robert Higginbotham, head of global institutional services at T Rowe Price, is not convinced that technology companies would get stuck in. But he added: “We need to raise our technology game, wherever we can.”

Technology firms declined to discuss their plans, if any. One asset management chief executive expressed hope that the regulators would stop them being assertive. But not everyone is convinced.

If they don’t want to lose their networks of clients, managers need to use the current window of opportunity to push technology from the back office into marketing departments, while making use of data to assess client preferences.

PwC believes managers will need to hire chief digital officers to co-ordinate such initiatives. A staggering 40%, it says, are failing to engage through social media, other than hosting a website.

A survey by wealth adviser MyPrivateBanking shows advisers are poor at communicating the performance of their funds, overall costs and adviser pay. Less than 10% of managers offer mobile apps. For the record, it rates Invesco, Franklin Templeton and Vanguard the highest.

Jeffrey Wallis, managing partner of SunGard Consulting Services, is baffled at the failure of asset managers to use their own data effectively. He said: “Firms have to hold massive amounts of data for regulatory reasons, yet don’t mine it. If they do not learn to use it they face serious competition from younger, more aggressive rivals.”

John Ions, chief executive of Liontrust Asset Management, takes the point. He said: “We have so much data inside our business that, if we could just analyse it properly, we probably would never need to buy an external bit of data.”

Murat Unal, chief executive of Frankfurt-based advisory firm Funds@Work, believes asset managers are also being held back by the way people work in silos. Each marketing team guards its own patch, and they do not pool data and contacts to broaden their search.

--This article first appeared in the print edition of Financial News dated June 9, 2014.